Synovus Has Earned Its Independence — For Now

The takeover target on Synovus Financial (SNV) did not disappear last quarter, but it may have faded.

The Columbus, Ga., lender hobbled by bad construction loans showed enough progress to convince Wall Street that it is likely to stay independent through at least the rest of this year and most of next, analysts say.

The $27 billion-asset company posted its third straight profitable quarter. Nonperforming loans declined to their lowest level in more than four years. Expenses fell, fee revenue rose and margins widened.

Having lost slightly more than $3 billion from 2008 to 2011, Synovus is no longer on the brink of failing or being forced into a fire sale like South Financial Group of Greenville, S.C., or Wilmington Trust of Wilmington, Del., were in 2010, experts say.

"We all want to know: is Synovus going to stay independent? And my sense is the company is going to go it alone," says Christopher Marinac, an analyst with FIG Partners.

For now, Marinac adds.

Synovus is making "incremental progress" in its turnaround, he says, but it remains an open question whether the 291-branch lender will be operating on its own in two years or as part of BB&T (BBT), Toronto-Dominion Bank (TD) or some other big rival, he says.

"That is because the company isn't earning enough," Marinac says.

It has about 18 months or so to fix that problem, he and other analysts say.

Synovus is constantly subject to takeover speculation because it is the smallest — and easiest to acquire — of three publicly traded regional banks that have been slow to recover from the crisis. The others are SunTrust Banks(STI) of Atlanta and Regions Financial (RF) of Birmingham, Ala.

Synovus' numerous issues range from a low share price to high exposure to commercial real estate across the South.

Its prospects for staying independent may depend on two key financial hurdles. One involves an $800 million tax break on losses that it needs sustained profitability to recognize. That so-called deferred tax asset is worth about $1 per share at a company that closed at just $2.12 per share on Wednesday. Recovering it is an accounting decision that will be based on actual profits and estimated future profits.

Marinac estimates that Synovus must earn at least $150 million in 2012 to recover at least $50 million of that DTA this year.

It earned $21.4 million in the first quarter and $12.8 million in the prior quarter. It lost $94 million in the first quarter of last year.

Recognizing that DTA would boost its share price while helping solve its most pressing problem: Repaying $968 million owed to the Troubled Asset Relief program before the dividend on that aid hikes to 9% from 5% late in 2013.

Its capital bind is structural. The Treasury Department owns shares in the bank holding company, which can raise repayment funds from investors or from its subsidiaries.

Synovus conducted a series of dilutive stock offerings from 2008 to 2010. If it has to do another big one, an outright sale of the company might be a better alternative for shareholders.

The best scenario would be to avoid a stock offering by recovering the DTA and raising the rest of what it needs from its banking operations in Georgia, Alabama, South Carolina, Florida and Tennessee.

But there is a hitch. Regulators must approve transfers from the bank to the bank holding company. Synovus needs to show more improvement. It is well-capitalized, but it ended the quarter with low profits and high levels of overdue loans.

Synovus Chairman and Chief Executive Kessel Stelling told investors on Tuesday that it could recover that $800 million DTA as early as this year. Synovus may also ask permission from regulators to upstream capital to the bank holding company this year, he said.

"As we continue our progress from a credit and earnings front, those discussions get more appropriate," Stelling said.

How much capital does the holding company need to raise to get out of Tarp without having to sell itself? About $720 million to $770 million, estimates Jeff Davis, an analyst with Guggenheim Securities.

Its Tarp balance is $968 million. The holding company currently has about $400 million in cash, he says — $200 million to $250 million of which it wants to leave untouched as a cushion. Earning most of that money could be tough but not impossible, he says.

"What they have going for them is it's an awesome footprint," Davis says. "They are making money. The [nonperforming assets] are going down, not up ,and capital is building. So those three things are big pluses."

That said: "I think they are in a pretty tight strategic box."